Options may be written on any kind of underlying assets, such as stocks, bonds, commodities or futures. There are 2 basic types of options:
- call options
- these give the holder the right to buy
- put options
- these give the holder the right to sell the underlying asset in the future at a specified strike price
The writer of the option has the obligation to sell (call) or buy (put) the asset. For European options, this right can only be exercised at the date of maturity, but for American options the rights can be exercised at any time until the date of maturity. Options are traded regularly on exchanges.
Because the holder has no obligation to exercise the right, while the writer does, this asymmetry results in an intrinsic cost the holder has to pay the writer.